As the S&P 500, Dow Jones Industrial Average, Russell 2000 and Nasdaq (almost…it did cross 5,000 for the first time since early 2000) all continue to forge new all-time highs, the question on everyone’s mind is: “Which sectors are driving the market higher?”
Our answer: It was a mixed bag until three weeks ago when most of the market started to move together — except for energy and utilities.
Looking back, the current uptrend on Wall Street began in mid-October of 2014. At that time, virtually every sector started to rebound in lock step through most of November. However, once December hit, various sectors took turns leading the way. Some outperformed, while others underperformed, and then they would switch roles.
Once early February hit, everything changed. While the rest of the market resumed its uptrend, utility and energy stocks started dropping.
You can see this evolution in the chart below, in which we have plotted the returns of the following exchange-traded funds (ETFs):
- SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — Black
- Energy Select Sector SPDR ETF (NYSEARCA:XLE) — Blue
- Financial Select Sector SPDR Fund (NYSEARCA:XLF) — Turquoise
- Health Care SPDR (ETF) (NYSEARCA:XLV) — Bright Green
- Industrial Select Sector SPDR Fund (NYSEARCA:XLI) — Pink
- Materials Select Sector SPDR (NYSEARCA:XLB) — Red
- Technology SPDR (ETF) (NYSEARCA:XLK) — Blue/Grey
- Utilities SPDR (ETF) (NYSEARCA:XLU) — Brown
Fig. 1 — Select Sector SPDRs Comparison Chart
Energy stocks have been depressed because oil prices have remained so low, but utility stocks are a great barometer of investor confidence and the desire for yield.
When investors are confident in the market, they tend to move their money from more conservative sectors — like utilities — to more aggressive sectors. This tends to put downward price pressure on utility stocks and utility-based ETFs like XLU.
High-dividend-paying stocks — like utilities — also tend to suffer when Treasury yields start to rise. If investors can receive higher yields in low-risk Treasuries, they tend not to be willing to pay a premium for high dividend yields. As you can see in the chart below, the yield on the 10-year Treasury ($TNX) has been rebounding since early February and is now comfortably above 2%.
Fig. 2 — 10-year Treasury Yield ($TNX)
Based on this divergence between those sectors that tend to do well during economic expansions and those that tend to under-perform — namely utilities — we anticipate more bullishness to come.
Traders appear to still have plenty of confidence that this bullish run we’ve enjoyed for the past six years — beginning in March of 2009 — on Wall Street still has the ability to carry on.
We’ll be watching Friday’s unemployment and non-farm payrolls report like hawks, but as long as we don’t get any huge negative surprises, watch for stocks to hold strong.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
You can learn more about identifying price patterns – like ascending triangles – and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.
